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MIC Unit 1 Practice Exam 2 Solutions

# MIC Unit 1 Practice Exam 2 Solutions - SOLUTIONS NAME...

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Economics 310-1. Professors Hornsten and Braeutigam Page 2 First Midterm, Fall 2010 1) Suppose the market for butter is competitive. The demand schedule for butter is Q d =16(P b ) -1 (P m ) 0.8 (Y) 0.4 , where Q d is the quantity of butter demanded when the price of butter p is P b , the price of margarine is P m , and the level of income in the market is Y. The supply schedule of butter is Q s = 4P b . You may assume that the price of margarine and the level of income are exogenous in determining an equilibrium in the butter market. a) (3 points) Briefly explain or demonstrate how a small increase in the price of butter will affect total revenues from butter in the market? The elasticity of demand for butter (the exponent on P b ) is – 1, so total revenue will not be affected by a small price change. b) (3 points) Briefly explain or demonstrate how the demand schedule indicates whether butter and margarine are substitutes, complements, or independent goods in consumption? A higher price of margarine increases the demand for butter, so the two are imperfect substitutes in consumption. I.e., people tend to use butter instead of margarine. Note that because its exponent is smaller (in absolute value), the price of margarine has a smaller effect on the demand for butter than does the price of butter. c) (3 points) In a sentence explain whether the demand curve shows butter to be an inferior good, a normal good,
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MIC Unit 1 Practice Exam 2 Solutions - SOLUTIONS NAME...

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